Riposte: Portuguese default shouldn't be taboo

Thu Mar 24, 2011 10:33am GMT

-- The author is a Reuters Breakingviews columnist. The opinions -- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Hugo Dixon

LONDON, March 24 (Reuters Breakingviews) - A Portuguese default shouldn't be taboo. The euro zone should make clear that there will be no bailout until Lisbon gets its act together.

Portugal is in its current mess because Jose Socrates, whose minority socialist government has just fallen, has spent the last year dithering. The prime minister rejected many opportunities for a bailout from his euro zone partners, most recently in advance of a summit two weeks ago. Now time has virtually run out. It may take two months to call elections and form a new government and, in the meantime, Portugal has a big debt repayment due in April.

Lisbon's partners have two basic choices: offer Portugal a bailout package, even though parliament rejected Socrates' latest austerity measures; or tell the country to come back when it has sorted out its political mess. The likely outcome, as my colleague Pierre Briancon points out, will be the former. But the best choice would be the latter.

Writing Portugal a blank cheque would make a mockery of the conditionality that the euro zone, led by Germany, has been insisting on over the past year. It wouldn't just send a bad message to Portugal. It would also undermine efforts to keep Ireland and Greece, both of which have received bailouts, on the straight and narrow.

The concern, of course, is that such an approach would push Portugal over the brink and cause contagion over the whole region -- essentially becoming the euro zone's "Lehman moment". There certainly would be fallout. But Portugal only represents 1.8 percent of euro zone GDP -- and the two weakest members of the currency union, Ireland and Greece, have already been rescued. The biggest risk would be Spain, which could find itself dragged back into the mire. Madrid should put in place strong contingency plans to make sure this doesn't happen.

What's more, taking a tough line with Portugal doesn't mean that it would be pushed over the edge. Most likely, the fear of imminent default would knock heads together in Lisbon -- and the politicians who have voted down Socrates' austerity plan would come into line even before the election. But if they didn't, the outcome wouldn't be a disaster. After the election, the euro zone would still be there to help pick up the pieces.

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CONTEXT NEWS

-- Portuguese Prime Minister Jose Socrates resigned on Wednesday and warned of grave consequences for the country after parliament rejected his government's latest austerity measures aimed at avoiding a bailout.

-- Portugal graphics: r.reuters.com/suf75r r.reuters.com/syr68r

-- Reuters story: EU leaders set to delay decision on bailout fund [ID:nLDE72M1E6]

BREAKINGVIEWS-Europe can, and will, give Portugal time [ID:nLDE72N0MS]

-- For previous columns by the author, Reuters customers can -- For previous columns by the author, Reuters customers can click on [DIXON/]

(Editing by Chris Hughes and David Evans)

((hugo.dixon@thomsonreuters.com)) Keywords: BREAKINGVIEWS PORTUGAL/RIPOSTE